A Let’s Get Rich with Pattu podcast listener says, ” I learned about your podcast today and watched an Episode on Stocks vs. MF Investing on YouTube. It was interesting and packed a lot of common sense in a simple and interesting way. I have a question which I request you to answer”.
“I shall retire next year with a reasonable pension. I currently invest in Index funds and direct stocks, apart from PPF. My present equity portfolio is about 70 lakh (75% large cap, 25% mid & small cap)”.
“Post-retirement, I want reasonable returns from my equity portfolio to be withdrawn when needed – holidays, marriages, etc. I don’t need it every month for regular expenses. I have thought of 3 broad investment themes for my equity portfolio post-retirement.
1. Direct Equity – mainly large cap with about 20% mid/small cap.
2. Direct Equity – 50% good dividend stocks, 50% in large/mid/small cap stocks.
3. Index Funds – 100% – Nifty 80%, Nifty Next 50 – 20%.
Which themes suit a retirement portfolio, especially concerning yearly and tax withdrawals? Or is there something else I should look at?”
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The primary considerations are:
- How big is my overall retirement portfolio? In other words, is it big enough to combat the inflation of at least 5-6% each year, considering the sequence of returns risk (or bad luck) in the equity markets? To determine this, you can use a comprehensive tool like the freefincal robo advisory tool.
- We recommend at least 10-5 years of inflation-adjusted income in a relatively risk-free income bucket. If this is manageable, we recommend no more than 30% equity.
- This is an example of the full bucket strategy suggested by the robo advisory tool: Retirement plan review: Am I on track to retire by 50?
- Those with a larger corpus can consider income flooring or laddered annuities. See Planning for Retirement multiple pension streams.
- Also, see: How much equity should I hold after retirement?
If the corpus is large enough to comfortably tackle sequence risk and combat inflation in retirement, we can consider ways to construct the equity portfolio.
Few retirees will have an established equity portfolio with stocks and index funds. The existing mix of 75% large cap and the rest in mid and small caps is fairly okay if the overall equity exposure is not more than 30%. This will ensure minimal tax incidence due to churn in equity constituents (if not zero).
Regarding dividend stocks, I think you would already be holding some good dividend papers in your large cap portfolio. So that should do. There is no need to change anything just because divided are now taxed as per slab. Even post-tax, it can be a good source to fund our wants.
Perhaps after a decade or so into retirement, you can slowly reduce direct equity exposure and increase the exposure to index funds, as managing these would be easier.